China’s A-share market is unlikely to make it to the MSCI emerging market index in June or any time before a planned Shenzhen-Hong Kong stock trading platform comes on stream, UBS said Thursday.
David Rabinowitz, UBS head of direct execution services for Asia, said the A-share market is not MSCI-ready because investors cannot access broader sectors of the mainland’s equity market.
They can invest in A shares through the Hong Kong-Shanghai stock link but these are heavily skewed toward the financial sector, he said in a teleconference.
“For customers who are investing into China through 2823, [A50 ishares exchange traded fund], the financial sector composition of the A50 is around 60 percent. In Shenzhen, it is roughly only around 13 percent,” Rabinowitz said.
He said the A50 ETF only has a 7 percent weighting for consumer and IT plays, whereas the Shenzhen stock market has 43 percent.
“So you are dealing with two very different markets and indices. We will need to see a fairer representation of China being offered to foreign investors and that’s exactly what MSCI is waiting for,” he said.
Rabinowitz said MSCI will be watching the Hong Kong-Shenzhen stock trading scheme with keen interest.
“My personal view is that we will not see a positive announcement from MSCI in June and they will wait until Shenzhen is added.”
The Hong Kong-Shenzhen stock link is widely expected to be in place in the second half but no a definite timetable has been set.
The MSCI Emerging Markets Index, launched in 1988, reviews its constituents each June to decide if a country can be included in the index based on economic development, market size, liquidity and accessibility.
The inclusion of A shares is expected to attract more global investors and bolster the renminbi’s internationalization.
Damien Horth, UBS head of equity research for Asia Pacific, said the Shanghai and Shenzhen exchanges have different compositions.
“Shanghai is more skewed to state-owned enterprises, more mature businesses, more cyclical businesses while Shenzhen is more skewed to new economy, more medium-sized enterprises, non-cyclical sectors,” he said.
He said there are more consumer stocks, technology and industrial counters in the Shenzhen index and companies register stronger earnings growth with higher valuation.
“It is a unique investment opportunity and something very different from Shanghai,” he said.
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